Momentum’s Financial Advisors, Eric Windell and Thamsanqa Khumalo, answered a few questions we had about savings, education costs and how you can afford it.
How often should one be saving?
With budget allowing, one should save regularly and constantly to ensure that a savings pocket is available for times in need. It is often easy to convince yourself that your budget is constraint and therefore you have no money to save but you need to look at how much you are spending and the importance of items on which you are spending your money. Measure that in terms of needs and wants and apply the elimination process where you eliminate all your wants and save that extra cash towards your needs like children education.
How much should we be saving?
For a budget perplexed individual, the 50/30/20 rule must be applied to determine how much one should be saving.
This means that about 50% of your take home income must go towards fixed costs like mortgage payment, car payment and other fixed subscriptions like gym membership etc,20% must go towards your financial priorities that will help you secure your financial foundation, like saving towards your retirement, children’s education and wealth creation purposes. And the 30% must be allocated towards flexible expenses/spending, as much as it is recommended to keep flexible spending below 30% it is sometimes difficult as these day-to-day expenses vary each month.
The above rule should apply to every individual regardless of their stage within the life cycle philosophy.
Momentum has, however, come up with a product (My savings Portfolio) that allows individuals to save from as little as R250 a month towards education, wealth creation, retirement and anytime savings.
The premium allows for low income earners to teach themselves the habit of saving.
What are tax free savings?
This is a savings product that offers individuals tax savings benefits, you benefit from such a product by not having your savings taxed. All the returns and proceeds from tax-free savings products are completely tax-free. This means that when you invest in these products, you will not pay any capital gains tax (CGT) or tax on interest and dividends earned.
Why is school fees/education cost increases higher than inflation?
The need for quality education and increase in population are the main contributors to increase in education cost higher that inflation. As more children are enrolled to semi-private schools or institutions it means more teachers must be employed to accommodate a certain number of students per class. Such schools have capped funding from the state and increase their fees based on their expenses and not inflation.
You might want to read about what your school fees are used for.
School fees are sometimes more than university fees, how can parents plan for that?
The moment you plan to have a child should be the moment you plan for their education. Starting to save for your child’s education when they are born means you’ll have enough cash by the time your child is 7 years old, to pay off his/her primary school fees for the next five years or so, at the same time while starting to save for their university at the age of 7 or 10.
It is also advisable that you don’t save a fixed amount but rather have a fixed percentage/inflation based increase in premium annually to get value for your money in the future.
You might want to read this article on why you should talk to your kids about money.
What do you do when your savings for studies are not enough?
Regrettably Secondary Schools only offer a small subsidy to single parents and some parents in lower income groups and the onus is on parents to meet the costs.
Those parents whose children excel academically or on the sports field may be lucky enough to have their schools fees subsidised, but these cases are few and far between.
Whilst Universities and Corporate employers offer both subsidies and Bursaries, the selection process is extremely rigorous and in most cases parents are obliged to turn to Study loans when considering tertiary education. This not only places an additional burden on the parents’ monthly finances but also leaves the student with a large capital debt to service and ultimately repay after graduation, not the ideal way to start one’s working life….
In many cases parents also re-finance assets (e.g. draw down on a home loan) to pay for tertiary education which once again places an additional burden on their finances.
The secret of course is to start saving as early as possible and cater for anticipated increases in tertiary education.
How can you afford studies abroad?
South African Schools and Universities offer a level of education which is internationally recognized, however many students still want to study abroad.
This is extremely expensive given the Rand’s depreciating value against all major currencies. In the absence of sufficient savings prospective students (and their parents) are again obliged to turn to Student loans for financing.
You might want to read more about why the Rand makes studies abroad difficult.
